Differential Pricing in Social Networks with Strategic Consumers

Topic:

Differential Pricing in Social Networks with Strategic Consumers

Time&Date: 

 10:30 am -12:00 pm, 2019/12/12 (Thursday)

Venue:

 Room 619, Teaching A

Speaker:

 Prof. SHOU Biying (City University of Hong Kong)

Abstract:

Social networks have been playing an increasingly important role in consumers’ purchasing decisions. We analyze a monopolistic seller’s optimal differential pricing problem with strategic consumers connected in social networks. The consumers who purchase in the later period can get positive externality from his/her friends who have purchased in the early period, but they have to bear a utility discount for the delayed consumption. We consider networks with general structures, which means that the influences (connections) between consumers can be different and asymmetric. We address three research questions: (1) How do different social network structures influence consumers’ strategic purchasing decisions? (2) What is the optimal differential pricing strategy for the seller? (3) How much can the seller gain from using network-dependent differential pricing, compared to using uniform pricing?  We utilize the rational expectations framework to characterize consumers’ strategic purchasing decisions and analyze the seller’s equilibrium pricing policy based on a two-stage game theoretical model. We find that, first, when the influence between the consumers is symmetric and the intensity of the network externality effect is lower than a threshold, it’s optimal for the seller to conduct an increasing-pricing strategy. However, when the influence is asymmetric and the network externality effect is very substantial, the seller may use a decreasing-pricing strategy for some consumers. Second, we show that ignoring consumer network structure can cause substantial profit loss under certain conditions, which implies the high value of network information in such cases. Finally, the comparison between the differential and uniform pricing policies shows that the influence asymmetry among the consumers is beneficial for the seller in the former case but harmful in the latter case. This is joint work with Rui Zheng.